During the past decade, many leading automakers have aggressively cut costs, assets, and processes from their supply chains, thus setting a new standard for managing their supplier relationships. Auto suppliers should be following suit because they badly need to prune costs from their own supply chains. But a new study1 suggests that these companies have been slow to adopt leading-edge purchasing practices.
Auto suppliers typically make purchases in a less disciplined way than their customers, so their bottom lines are shrinking. Materials and services constitute more than half of an average supplier's costs. For a supplier with revenues of $2 billion, even a 5 percent reduction in the cost of direct and indirect goods2 would raise operating profits by 40 to 50 percent. Other ways of generating that kind of impact—a 50 percent increase in revenues, for example, or the elimination of 10 percent of the workforce—are much more extreme.
Our survey's most troubling message is that auto suppliers know what they should be doing but simply can't do it. They agree that managing a company's aggregate spending in a more disciplined way and monitoring compliance with corporate standards are two hallmarks of good...